Demonetisation, cattle slaughter ban, and India's cyclical agrarian crisis

  • Blog Post Date 04 August, 2017
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Parag Waknis

University of Massachusetts

In this article, Parag Waknis discusses why India’s rural economy is always on the precipice of crisis, and how the recent shocks of demonetisation and cattle slaughter ban exacerbated the crisis by destroying rural incomes and choking off farmer’s main source of emergency funding, respectively.

The indebtedness of India’s farmers and related agricultural issues are once again part of the media cycle. Farmers from Tamil Nadu have been protesting in the capital for a few months, joined by other farmers across the country in making their displeasure known. The backdrop of some states handing out loan waivers has given this whole issue a political slant.

The origins of the current farmer protests are certainly more than simply political. This should come as no surprise given that the rural economy is always in crisis mode. However, the situation has this time around gotten exacerbated as rural India found itself cash strapped after demonetisation, with the cattle slaughter ban likely proving to be the tipping point.

Why is the rural economy always on the precipice of crisis?

The answer lies in a combination of factors. There are significant problems related to getting the agricultural produce from the farm to its final point of sale. There are some solutions like cold storage and improved transportation that could address these problems as well as increase the bargaining power of the farmers. We have not seen much progress on that front.

In addition to these, there is the need to increase irrigated land. About 35% of agricultural land in India is irrigated. This makes a substantial proportion of crop production dependent on monsoons – a factor out of farmers’ control. A solution to that is insurance. But the state of crop insurance is dismal with almost 83% of claims remaining unpaid. This does very little to reduce the farmers’ vulnerability to monsoon shocks. In addition, desertification of farm land has increased in 90% of states with nearly 30% of India being degraded or facing desertification. This affects productivity of agricultural land reducing returns for farming. The Mahatma Gandhi National Rural Employment Guarantee Scheme Act (MNREGA) payments help but there have been substantial delays that might actually exacerbate the situation (Basu and Sen 2015). In addition, there are deeper structural issues related to landholding patterns, lack of clearly-defined property rights, and the lack of quick redressal of disputes which require even more fundamental changes in the institutions governing the economy.

All these factors contribute to the rural economy hanging by a thread and substantial indebtedness of Indian farmers. Overall, the percentage of indebted farming households increased from 49% in 2003 to 52 % in 2013. This data is from Situation Assessment Survey of Farmers conducted as part of National Sample Survey Organisation (NSSO) surveys. The first such survey was conducted in 2003 (57th Round) and the second one in 2013 (70th Round). The 52% overall indebtedness means that more than half of the farming households have at least one outstanding loan. There is substantial variation in this indebtedness as well. For example, Andhra Pradesh had 92% of its farmers indebted, followed by Telangana and Tamil Nadu at 89% and 82% respectively. The state of Maharashtra had about 57% of its farming households with outstanding loans.

The detailed data on landholding patterns and its relationship to the indebtedness of farmers sheds some more light on farmers’ vulnerabilities. According to analysis in Rajeev et al. (2012), which is based on 2003 data, most of the loans that the farmers took were for income generating purposes, financing agricultural capital expenses and non-farm expenses. Contrary to popular belief, only about 11% loans were used for spending on marriages. The good news in 2013 data compared to 2003 data, is that reliance on informal sources of credit reduced and that on formal sources like banks increased. This shows some improvement in financial inclusion over the decade. However, in both the NSSO survey rounds, dependence on informal sources of credit is larger for smaller farmers. The percentage of households with landholding less than four hectares is almost 90% and with those below two hectares constitute 80% of these farmers. These are the small and marginal farmers. These farmers also pay higher interest on these loans. Rajeev et al. (2012) report the modal interest rate of 36% for credit from informal sources which was almost three times the interest rate charged by banks at that time.

To summarise, most of the Indian farmers are small or marginal farmers; more than half of them are indebted; they often paying thrice the interest rate compared to what is charged by formal sources; and with hardly any marketable surplus they are the most vulnerable to shocks. To this situation, add the shocks created by demonetisation and cattle slaughter ban.

How demonetisation and cattle slaughter ban exacerbated the crisis

Demonetisation played havoc with people’s lives – disproportionately so for people who were completely dependent on cash for transactions. A substantial portion of these people comes from the rural economy – the small and marginal farmers. The following are some of the ways in which demonetisation has or may have affected these farmers:

  • Most of the poor farmers who depend on moneylenders for their financing needs probably had that source dried up. Suddenly, the cash holdings of farmers as well as of moneylenders were rendered worthless.
  • Even if these farmers could turn to banks for their financing needs, the banks themselves were saddled with cash that was useless. The situation does not seem to have improved even over eight months after demonetisation. For example, a ground report by states that due to technological problems, in Kurnool district of Andhra Pradesh “often business correspondent outlets become non-functional at a time when they are needed the most: either on the day of the weekly village fair or when wages for work done under the National Rural Employment Guarantee Act have been deposited into accounts.”
  • Aadhaar1 payments were also digitised almost simultaneously and many farm schemes needed Aadhaar verification. This verification could not be done due to mechanical and logistical failures, and as a result many farmers were kept from getting benefits. The ground report mentioned in the earlier point has a similar story to tell for Andhra Pradesh.
  • Demonetisation also lead to the loss of purchasing power for many urban consumers resulting in collapsed demand for agriculture produce as most of these transactions are cash based. The middlemen and other intermediaries who help in getting the produce from farmers to retailers deal in cash and may not have had enough of the legal denominations to buy the produce from farmers. Given, the lack of cold storage facilities, farmers had to let the produce go waste increasing the need for credit to cover the losses. Harish Damodaran and Mridula Chari have detailed price data for agricultural produce in various states from where farmers are protesting that shows the dramatic fall in prices post demonetisation.
  • Demonetisation seems to have affected collection efficiency of microfinance as well. According to Mayank Jain in the collection efficiency is down to 75% to 80% from the usual 95% stated in a report released by India Rating. The report further states that Maharashtra was one of the worst-hit states in the country where demonetisation has led to collections below 10% in certain districts. This fall in collection efficiency is important because it affects the ability of these microfinance agencies to offer new loans adding to the overall credit crunch.
  • Demonetisation created shortage of cash exactly at the time of sowing. The cash crunch has not yet been resolved even though the second sowing season is close. Atul Deogaonkar says that a loan waiver at this point may actually not help sowing given the complicated rules to qualify for a loan waiver.

All these factors suggest that the situation in rural India must have become dire after demonetisation. All of the scrapped notes have not been replaced yet. The brunt of it is felt more in the rural areas where access to credit and banking services is severely limited to start with. In most cases, the small and marginal farmers must have already hypothecated their land to raise money from moneylenders or banks. With no other assets that can be used as collateral to raise new loans, the farmers must be facing severe liquidity crunch. What do they do in such a situation? An urban consumer faced with such a situation might sell his or her gold to raise cash. With no significant gold, farmers resort to selling their only other productive asset – cattle.

Most of the farming households in India have some livestock. According to NSSO’s 70th round, on an average livestock contributes to about 12% to monthly farming income and claims 18% of monthly expenditure. Anagol et al. (2014) call this a puzzling behaviour of Indian farmers where they continue to hold cattle despite the substantial negative rates of return on both cows and buffaloes. I think it is puzzling if we consider the return on cattle only in terms of the bovine output like milk. This is the intrinsic return associated with cattle’s productive role. However, productive assets like cattle could also be sold to help tide over temporary shortages of cash or credit. This is the liquidity return for cattle. In normal times farmers reap a negative intrinsic return on cattle. In times of financial distress, farmers can sell the cattle and avail of the positive liquidity return. Indian farmers are often faced with this situation because of a lack of formal dependable insurance mechanisms or easier access to credit. As shown by Lagos and Rocheteau (2008), in an economy where money or alternative means of payment are scarce, people may accumulate productive assets to an inefficient level to take advantage of their liquidity service. Thus, Indian farmers are behaving rationally by holding on to an asset with negative intrinsic return. This is where the cow slaughter ban and the associated vigilantism becomes important. By making cow slaughter difficult or impossible, the government just took away the last resort for the struggling poor farmers. There is ample anecdotal evidence about this struggle. For example, Parth M.N. chronicles a story demonstrating the plight of Marathwada farmers after the ban.

Thus, together, demonetisation and cattle slaughter ban may have pushed the rural economy over the edge – one by destroying incomes and the other by choking off major sources of emergency financing for farmers – informal finance and sale of cattle. Till now we have seen farmers from only few states asking for loan waivers. We should not be surprised to see many more from different states joining them. With the economy slowing down for two consecutive quarters (Q4 2016 & Q1 2017) on account of damage from demonetisation to the informal sector, a full blown agriculture crisis does not bear good news for the immediate future.

This article first appeared on The Wire:


  1. Aadhaar or Unique Identification number (UID) is a 12-digit individual identification number issued by the Unique Identification Authority of India (UIDAI) on behalf of the Government of India. It captures the biometric identity – 10 fingerprints, iris and photograph – of every resident, and serves as a proof of identity and address anywhere in India.

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